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III. Department of Commerce Information on the Individual Validated Licensing System The Individual Validated License (IVL) is at the heart of the licensing process. Even though more foreign sales of U.S. firms occur under some form of bulk license (See Chapter II), the IVL application procedures and regulations are the major competitive factor of the whole control system. It is the boundary conditions established between licensed and nonlicensed and between IVL and bulk licenses that are especially critical in determining competitive problems with the system. It is, for many firms, the procedure which creates the greatest difficulties. Much of the public perceptions related to operation of U.S. export controls are based on information related to the ILL administrative process. Therefore, understanding the parameters related to the operation of the IVL license process are important. This chapter focuses especially on measures of processing time to show how uncertainty from the point of view of the firm is created. This uncertainty due to processing time variances affects the ability of a firm to be a reliable supplier. Another aspect of the system is the level of technology that the process is covering. What -27-
is shown is that a large portion of the license load is very low tech, low sensitivity items. The system shows little systematic relationship between processing time and level of criticality of the item or technology specified in the license. Another conclusion which will be developed in this and later chapters is that the statistics routinely reported on the IVL administrative process are misleading with respect to how the system is influencing U.S. competitiveness. The Department of Commerce processes in excess of 120,000 Individual Validated License applications annually. Table lO provides summary data on the number of cases handled by the DOC quarterly between 84.3-86.1, the dollar value, the dollar value of denied license applications, and the percent of cases Returned Without Action (RWA). The number of cases closed each quarter averages very close to 30,OOO with a quarterly value of $17 to $20 billion. Some of these reported operating parameters must be carefully interpreted. This is true with respect to dollar value of coverage, rate of denial, average processing times, or rate of RWA. As indicted earlier, for example, firms probably request on average up to twice the value of -28-
products they actually ship. Another example is the rate of license applications denied, which averages about 1 percent of the total value of applications. This would seem to indicate the system is not very restrictive. But, as will be discussed in subsequent parts of this report, this rate of denial does not reflect the real degree to which U.S.-based firms are seeing the constraints of the license system bind on their international operations.35 Table 11 shows the 10 largest Commodity Control List (CCL) categories for approved applications for manufactures ranked by value for FY85. Just these 10 categories accounted for 92 percent of all IVL license approvals (related to manufactured items), by value, in FY85. Ranking the CCLs by occurrence shows a similar high degree of concentration; six of the largest categories ranked by value also appear on this list. (See Table 12.) The degree of concentration indicates the extent to which the 35This statement is not intended to infer either in a positive or in a negative way on the value of the constraints. The point is that the degree of restrictiveness cannot be directly gauged by the percent of licenses denied nor the associated dollar value. This point is discussed further in Chapter V. -29-
controls tend to be focused on a relatively few number of industrial categories.36 Just as the license system tends to focus on a relatively limited set of industrial categories, the system also only applies to a subset of U.S.-based enterprises. In FY85, approximately 250 firms filed 50 license applications or more, with the total applications for these 250 firms being about one-third of the total of all applications for IVLs received by the Department of Commerce.37 In value terms, the top 164 firms had applications totalling $34 billion out of a total of about $64 billion. Information collected from U.S. firms, combined with the Commerce information, suggests that somewhere between 2,000 and 3,000 firms are actively applying for licenses each year.38 It is important to note that over time a larger number of U.S. firms actually 36The mapping between CCL categories and Standard Industrial Classifications (SIC) is not that strong. For example, a commodity may fall into CCL Number 1565 only because it contains a microprocessor. But after sampling firms that use the licensing system, it became clear the ranking of CCL occurrences are reasonably indicative of where the focus of the controls falls on U.S. industry. 37These firms filed approximately 33,000 applications. 38Some of these are foreign capitalized firms. -30-
interact with the licensing process because some firms drop out as others enter. Thus, if one looks only at the statistics on CCL occurrences and only the estimated number of U.S.-based firms that are actively involved annually in the licensing system from the U.S. perspective, one would conclude the system is relatively concentrated. It does not fall broadly across all industries, nor does it affect all U.S.- based firms. . l, A slightly different perspective on the extent of influence of the system is obtained by noting the number of foreign enterprises (distributors, affiliates, unaffiliated firms) that interact with the U.S. export licensing system. Commerce data on foreign distributors, affiliates, and end- users, indicates that 100,000 to 200,000 foreign enterprises have some degree of interaction with the U.S. licensing system. The fact that the number of foreign enterprises involved with the U.S. licensing system is over 30 times the number of U.S.-based firms begins to indicate the broad reach of the system abroad and why any competitive disadvantages created by it can ripple outward over a large number of enterprises. -31-
Processing time for IVL license applications and associated uncertainty over it is frequently cited by firms as one of the major problems they have with the export control system.39 This is the next issue to be examined. The average processing times for various types of cases and destinations reported by the Department of Commerce for most of the first quarter of 1986 are shown in Table 13. Processing time varies significantly by country of destination and whether the case is referred within the U.S. government from DOC to other agencies for review. Applications for exports to COCOM, not requiring referral, take an average of 14 days, while applications involving the People's Republic of China were taking an average of 156 days.40 Records for average processing times for earlier periods indicate they have not varied significantly in the past four quarters.41 While the average processing time is 27 days, the distribution is very skewed--with 74 39See response to NAS Questionnaire, Appendix C, for example or the American Electronics Association Questionnaire, Appendix D. 40PRC case handling times have probably declined since this profile was prepared. The point regarding variation of processing times is still valid because applications for Bloc destinations and certain West, non-COCOM countries can have very high average processing times. 41For example, in FYi985, the average processing time for all cases was 26, 28, 30, 28 days respectively. In 1986.1, it was 27 days. -32-
percent of the cases requiring less than `25 days to process and approximately 5 percent of the cases extending beyond 100 days. Figure 7 shows the distribution of processing times for licenses approved in April 1986.42 The processing times reported by DOC (defined in this report as DOC Processing Time) cover the time from entry into the Commerce Department system until license issuance (but not receipt of license by the exporter). There is a second way to measure processing time-- from the viewpoint of the firm applying for a license. This definition of license processing time includes the time from when the firm initiates its filing for a license, plus DOC's pre-screening time, as well as the DOC processing time plus any time related to an application being returned without action and refiled.43 Thus, it is a better measure of the distribution of processing times for license approvals as seen by the firm because it covers the total time, except for the time required to send the approved license back to the firm. This second definition we called Total Processing Time. For the cases approved in 42See Appendix A for a description of the sample used to make the estimate. 43See Appendix A for further discussion of the definition and the sources of the data. -33-
April 1986, the average Total Processing Time was 54 days with one-third of all cases requiring more than 30 days of Total Processing Time. This contrasts to the DOC reported average processing time of 25 days. Figure 8 displays the distribution of processing times using this definition. Figure 9 compares the distribution of processing times for the two definitions. Note that the right-hand tails of the two distributions--the portion greater than 30 days-- are significantly different. This is partly due to the inclusion of RWA times in the Total Processing Time definition. Since RWAs occur frequently (overall about one in six cases are RWAd), this is a better measure of the total duration of processing as seen by the firm. Figure 10 compares the two definitions of processing times again, this time on a cumulative basis. Note that over 80 percent of the cases under the DOC definition fall under 30 days, whereas only half of the cases do under the Total Processing Time definition. The sample of approvals was be divided up by destination, whether it was a West-West or East-West (including the PRC) transaction. Figure 11 compares the distribution of Total Processing Times for the different -34-
destinations. Licenses for East-West transactions have a very different distribution, with over half taking in excess of 50 days versus 15 percent of the West-West cases taking more than 50 days. If the PRO cases are dropped from the sample, the Bloc case processing times are seen to fall predominately in the 30 to 100 range, whereas West- West cases fall predominately in the 20 to 50 day range. (See Figure 12.) What these figures indicate is that while reported average processing times are under 30 days, the distributions of processing times independent o f destination have fairly wide dispersions. This creates uncertainty for firms using the system. Average processing times were also calculated for applications filed by small firms and large firms. The hypothesis was that small firms might experience greater difficulty with the system due to their inability to cope with its complexity and therefore longer processing times on average would result. Using the DOC definition of processing time, the hypothesis is not borne out. Large firms obtained 85
percent of their approvals in under 30 days while small firms received 80 percent of their approvals in under 30 days. But a significant difference is revealed when the alternative definition for processing time is used (i.e., Total Processing Time) and further if destination is also taken into account. (See Tables 14 and 15.) Table 14 is again based on the DOC Processing Time definition; Table 15 uses the Total Processing Time definition. Using the Total Process Time definition shown in Table 15, small firms experience an average 14 percent longer time for processing. But a further difference is revealed if processing times are calculated for West-West versus East- West destinations.44 The DOC definition (Table 14) still shows no difference for West-West, but reveals that smaller firms' approvals for East-West destinations are taking 22 percent longer. There is also a marked difference in the number of East-West approvals processed under 40 days. For large firms, it was 72 percent, while for small firms, it was 40 percent. This is an indication that, at least for licenses for East-West trade, small firms do seem to have a greater difficulty with the license system. 44Note: for the purposes of these comparisons, applications for the PRC were included in the East-West category. -36-
The evidence regarding small firms is even more supportive of the basic hypothesis if the Total Processing Time criteria is used. (See Table 15.) In West-West trade, small firms averaged 46 days processing time, while large firms averaged 35 days.45 An interesting item to note is that for East-West trade, large firms average 145 days versus 96 days for small firms. This was due to some extremely long-lived 810c licenses appearing in the sample for large firms. The distribution of processing times (percent under 40 days) measure is more indicative. Almost half of all large firm East-West licenses were approved under 40 days versus only 13 percent of small firm licenses. Thus, using Total Processing Time as the measure, the hypothesis regarding small firms having greater difficulty with the system seems supported by the evidence. There is a possibility that some of the firm effect is due to small firms clustering in CCL categories that on average have longer processing time. The data was tabulated for four major CCL categories and then subdivided 45This difference is very consistent with the results from the NAS Survey discussed in the next chapter. Surveyed small firms reported an average processing time of 48 days versus 38 days for the larger firms. -37-
by firm size. (See Table 16.) For the electronic computing category and the electronic device manufacturing equipment category, with respect to West-West trade, the results support the basic hypothesis. The sample sizes are too small to arrive at any clear results with respect to East-West trade. Further evidence is presented from data collected in the NAS Survey in the next section. (See Tables 21, 22, and 23.) The next issue to be covered are licenses Returned Without Action (RWA). In terms of work load in the license processing system, RWAs are an important factor because according to Department of Commerce information, approximately one of every six cases processed by DOC each quarter is RWAd.46 The RWA rate is a somewhat misleading statistic, since some cases are RWAd a multiple number of times, the actual proportion of licenses RWAd is less. Still, the frequency of occurrence is still sufficiently high to create an additional uncertainty in processing time for an exporter. 46Note: the statistics reported in this chapter were collected prior to a DOC change in its policy towards handling a RWA case. This change would reduce the process times and also reduce the frequency with which RWAs occur in the system. -38-
The key parameters developed for a sample of 200 RWAs taken from the total FY85 RWA case file are summarized in Table 17. It was hypothesized that smaller firms would be RWAd more frequently due to lack of familiarity with the procedure associated with filing a license. While 58 percent of all RWAs occurred to licenses filed by small firms, this is not statistically different from the overall small company share of licenses filed. Another statistic developed was that only 52 percent of the cases examined were identified as resubmitted. This was considered to be a low number. The low rate of resubmission could be an aberration due to the way licenses were identified as resubmitted. If not, it could indicate a high degree of discouragement, that is, firms giving up because they cannot overcome objections of some reviewing agency. It also could reflect a phenomenon called "fishing" where firms explore the boundary conditions with a trial license, pulling it back before it gets denied. There is no way to know which of these possible explanations is most likely. The next category of license data analyzed relates to reexport license applications. Reexport applications in FY85 represented about 10 percent of the total DOC licensing case load. The information in Table 18 reports -39-
various overall measures for reexport applications. The number of applications nearly doubled between FY83 and FYS5, while license applications, excluding reexport applications, rose by about 88 percent. Approximately 81 percent of all reexport applications from COCOM countries were from affiliates of U.S.-based parents. (See Table 19.) For the three Memorandum of Understanding (MOU)47 countries in our sample, slightly over half were from affiliates of U.S.-based firms. One MOU country had an especially small fraction of applications from U.S. firms which pulled down the average for the three MOU countries in our sample. The last analysis of licensing data relates to the level of military criticality of the items being covered by validated licenses. The issue overall is to examine how processing times for licenses vary with the level of technology and the degree of diversion risk. A sample of 1,618 licenses was analyzed by Commerce Department license officers who identified, independent of actual destination, the level of military criticality of the item being exported. These licenses represented approximately 50 47The Memorandum of Understanding is an Executive Directive requiring Defense Department review of controlled exports to 15 named countries. -40-
percent of the applications on which processing was completed in the first week of June 1986. The sample is a representative cross-section of all license applications. Four levels of technology were specified: within Administrative Exception Note 9 (ANN), within PRO Green Zone, eligible for distribution license (DL), and above eligibility for the distribution license. These step up in degree of military criticality at each level. Appendix E presents the results of this analysis. It is a complex exercise to analyze and summarize. To begin, an overview of the tables contained in Appendix E is provided along with a discussion of their organization. Next, some general observations and conclusion based on the data are presented. The reader is encouraged to carefully review the data further due to the importance of this issue and the complexity of presentation necessitated by the complexity of the license process itself. The total sample of 1,617 licenses48 had 1,506 approvals (a 93 percent rate), the balance mainly being RWAs. (See Table E.1.) This is a lower proportion of RWAs 48See Appendix A for a discussion of the sample. -41-
and denials relative to the historically observed percentages. The reason for the difference is believed to be due to the Commerce Department's new policies designed to minimize the number of cases being RWAd. This change was instituted in the period just prior to the sample period. It is highly likely the RWA rates in the sample was influenced by the change. Table E.2A breaks the sample down by a very basic set of criteria. For the five destinations, the sample is allocated by whether the case was within AEN limits, or within PRO Green Zone limits, or required a DL, or was above the DL, in which case the term "supercritical" is used to denote this. The supercritical zone should be the most sensitive level of technology.49 Slightly over one-third of the sample was within AEN limits, slightly under one-third met PRC Green Zone limits, with 20 percent eligible for a Do, the supercritical category accounted for 13 percent of the sample. The average processing times increase with the sensitivity of the destination, as expected, but it is important to note, not with the level of criticality. (See Table E.2B.) 49Note these determinations were made for each case independent of actual destination. -42-
A summary of average processing times for each combination of destination and level of criticality is presented in Table E.3. Tables E.2A, E.2B and E.3 summarize information presented in Tables E.5A-E.9B which are detailed summaries prepared for each destination. Table E.4 presents a summary of negative actions for the different combinations of destination and level of criticality. The following general observations and conclusions are based on reviewing Tables E.2A, E.2B, and E.3: Free-worId destinations processing times 2. ~2 1. increase slightly with diversion risk (i.e., as you read up a column in Table E.3 from COCOM to Other-West to MOW); do not vary with criticality level, (i.e., across the rows for COCOM or Other-West or MOU ) except for unilateral foreign policy cases; do not vary as a function of unilateral versus multilateral controls; and are nearly SO percent longer for foreign policy than for national security controls. With respect to license actions 1. no AEN level cases were denied; -43-
4- the denial rate for "supercritical" items (>DL) was 4/208 = 1.9 percent, compared to 3/1409 = 0.2 percent for lower level items (<DL)--larger by a factor of 9; the denial rate to the Bloc was 2 percent, but only 42 percent of the applications exceeded AEN level; whereas non-Bloc applications above AEN were 62 percent of the total, and a large share of applications to COCOM (36 percent or 17 percent of the total sample) were submitted and processed in error, i.e., they were eligible for General License (GCOM). -44-